Amazon’s Greatest Weapon: Jeff Bezos’s Paranoia

Date: 15-11-2013
Source: The Wall Street Journal

Jeff Bezos, CEO of Amazon

Let me ask you to do something scary: Imagine you’re Jeff Bezos and you’ve just spent the morning studying your retail empire. How do you feel? Do you brim with confidence? Or do you harbor profound, unshakable paranoia about the rivals storming your gates?

I’m betting you’re paranoid. Indeed, I suspect your paranoia explains the frenzy of expansion that has gripped Amazon.com Inc. over the past few years, from its new effort to launch Sunday delivery to its move into grocery service to providing instant, face-to-face technical support on the Kindle Fire.

What could Mr. Bezos possibly have to fear? Impermanence. Mr. Bezos is in an industry, retail sales, in which every innovation is instantly pored over and copied, in which (thanks partly to him) margins are constantly driven to zero, and in which customers are governed by passing fancy and whim. Being online confers fantastic advantages to Amazon, but it also comes at a deep cost: Very little about its business is burned into customers’ minds.

Hence, frenzy: Amazon is in a race to embed itself into the fabric of world-wide commerce in a way that would make it indispensable to everyone’s shopping habits—and to do so before its rivals wise up to its plans.

The Sunday-shipping plan illustrates its M.O. The plan calls for spending every available resource to build a massively imposing shopping platform that rewires the key feature of modern commerce, from servers to shipping to customer service to marketing. Indeed, when you consider many of its recent efforts, including its $600 million contract to store the CIA’s data, it is more useful to think of Amazon as a global infrastructure company rather than a shopping site—more like Maersk than Macy’s.

Through this platform, the company hopes to become integral and unavoidable for all your shopping, even for stuff sold by other companies. And then, perhaps, it will begin to make real money.

Amazon’s deal with the U.S. Postal Service to ship items on Sundays is just a small piece of this plan, but it’s a shining example of the grand strategy. Over the past two years, the company has rapidly expanded its operations so that it can deliver items faster. In the past, in an effort to escape collecting state sales taxes from most customers, the company set up a handful of big warehouses in low-cost states from which it shipped items to the rest of the country.

Then Mr. Bezos changed the game. In deals with states that gave him temporary tax breaks, Mr. Bezos dropped his sales-tax opposition and instead began to build warehouses everywhere, including many that are close to big cities. Bringing items closer to customers let Amazon lower its shipping costs, making up for the perceived bump in prices due to sales tax. The new warehouses also made for much faster shipping, including, in some cities, same-day service.

Sunday delivery—which the company will offer at no extra cost to shoppers—continues this effort, and will likely inspire just the kind of delight that sends Amazon loyalists gushing to their friends. This delight is a key piece of the plan. By ferociously outspending rivals, Amazon can offer consumers a level of service that constantly surprises us—and that pushes everyone else in the business to spend just as much to compete.

Here’s a case in point: Not long ago, when I tried to return a too-large, $13 pair of sweatpants I bought from the site, I was presented with this amazing message: “As a valued customer, you don’t need to return this item to get a refund.” In other words, having calculated my value as a customer and the probability that return shipping would cost the company more than the item was worth, Amazon was willing to take a loss on the sale.

The Postal Service deal also points out the canny way that Amazon is attempting to commodify the consumer shipping industry. By helping to prop up the struggling USPS, Amazon is preserving competition for FedEx Corp. and United Parcel Service Inc.; if Sunday shipping proves popular enough for other retailers to adopt it, those private shipping giants might be forced to offer it, too.

But that is just the first piece. Amazon’s larger goal is to co-opt these shippers into its own shopping platform—to make Amazon, and not UPS or FedEx, the brand that businesses think of when they want to ship items to customers. Shoppers might not notice it, but many of the products on Amazon.com aren’t actually sold by Amazon itself; instead, these items are being sold by other companies who have contracted with Amazon to market, store, pack, and ship their wares. That is, instead of setting up separate deals with shippers, smaller retailers just go to Amazon.

By some estimates, Amazon’s sales of these third-party goods now exceeds sales of its own goods. Because Amazon collects a commissions on these sales—and because its marginal costs to service the sales are small, since it is using infrastructure that it has already built for itself—the company earns more on many third-party sales than it does for sales on its own goods.

This sets up a nice set of network effects for the company: Third-party items expand Amazon’s selection, which attracts more consumers to its site, which in turn makes Amazon more attractive for other third-party sellers. At the same time, as Amazon claims more third-party sellers, more customers and more sales, it wins further leverage over shippers like UPS and FedEx, further driving down its infrastructure costs-which, once again, feeds greater sales. It wouldn’t be crazy to guess that at some point, third-party sales will become Amazon’s main business, with its own goods just a slice of a much larger company that is mostly about e-commerce infrastructure, not e-commerce itself.

None of this answers the key questions plaguing the firm: Can it eventually make money on this plan? And, if so, how much? There is a ferocious debate about this among Amazon-watchers, though the real answer, clearly, is that no one knows. But if you like to buy things, you’re sure to benefit from Mr. Bezos’s paranoia.